Opel sale hits a snag. German government could be in a bind.

If the European Union sticks to its guns, General Motors may be able to sell its German Adam Opel AG unit in a more competitive auction or keep the company after all. Recall that GM just agreed to sell 55% of Opel to Canadian parts maker Magna International and its partner, Russia’s OAO Sberbank, and 10% to the workers. Magna won the bid because the German government wouldn’t give the needed $6.6 billion in financing for any other deal. The government would not finance a rival bid from RHJ International nor GM’s in-house efforts to restructure the company.

But now, the EU is balking on the deal. Neelie Kroes, the EU’s competition commissioner, has told German Economics Minister Karl-Theodor zu Guttenberg that the European Commission thinks the loan conditions slapped on the Opel sale were likely illegal. They may decide that GM should be allowed to reconsider the sale and look at other bidders or keep the company. In short, the EU says that the German government manhandled the Opel sale.

This creates a giant mess. In theory, GM could keep Opel if the automaker can get the financing to restructure the company. Sources close to GM’s board say that it needed $5 billion to restructure Opel. That means the German government, which has already blamed American management for the company’s woes, would be in the position of loaning money to GM to save 15,000 of Opel’s 25,000 jobs. GM would need concessions from union IG Metall, which has also demonized America management. GM could also try to get funding from the Polish, British or Spanish governments since those nations have Opel factrories.

The German government could reconsider the RHJI bid, but the government and IG Metall, Opel’s union, see the private equity firm as a pawn for GM. Plus, sources at RHJI say the firm has moved on from Opel. The investment firm just spent $366 million to acquire financial services firm Kleinwort Benson. That could make a $500 million investment in Opel tough right now.

Even GM, whose executives favored the RHJI bid and whose board was dismayed when CEO Fritz Henderson came to them after having negotiated only one clear-cut option, still favors the Magna deal. It seems that GM just wants to move on, get the bulk of Opel’s losses off its books and focus on fixing its North American business. But in the long run, it may pay to revisit Opel and see if GM can’t keep it and get it restructured anyway. With the right cost cuts, GM could turn Opel around. The shame of this story all along is that just as GM was putting out some good products (the new Astra and Insignia look like winners) the company had to cede control. If the German government and unions will work with GM, a new Opel could emerge and be a tough competitor.

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